U.S. stocks rose, reversing earlier losses and preventing the longest Dow Jones Industrial Average slump since 1978, as investors speculated the Federal Reserve will start another stimulus program. Treasuries 10-year notes erased gains, and the dollar slid.
The Dow halted an eight-day drop, gaining 29.82 points to 11,896.44 at 4 p.m. in New York. The S&P 500 rose 0.5 percent, rebounding after yesterday’s plunge drove it to the cheapest price-earnings ratio in more than a year. Ten-year Treasury yields rose one basis point to 2.62 percent. Oil slid to a five-week low following government data showing an increase in stockpiles. The franc fell from a record versus the euro and dollar after Switzerland reduced interest rates.
Speculation the Fed will embark on a third round of asset purchases to stem off a recession grew after the Wall Street Journal said three former central bank officials support the approach. More than $2.3 trillion had been erased from the value of global equities since July 22, and Treasury yields set 2011 lows, amid concern the economic recovery is faltering. Service industries grew in July at the slowest pace since February 2010, the Institute for Supply Management said today.
“Every time we see economic weakness, there will be discussion about more economic stimulus,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in telephone interview. “That could be the case given the fairly weak economic figures we’ve had. In addition, the market has given back a lot recently and people started to look at some bargains.”
Coca-Cola Co., General Electric Co. and Walt Disney Co. rose more than 1.2 percent to help lead gains in the Dow, which reversed a loss of as much as 166 points. MasterCard Inc., the second-biggest payments network, advanced 13 percent for the biggest gain in the S&P 500 after profit rose 33 percent as customers’ spending increased.
Concern about weakening economic data has overshadowed an earnings season that has seen per-share profits grow 17 percent and sales increase 13 percent at companies in the S&P 500 that reported second-quarter results since July 11. Earnings per share have topped analysts estimates at about three-quarters of the 363 companies that have reported, Bloomberg data shows.
The 8 percent slide in the S&P 500 from a three-year high in April through yesterday brought the index’s price- to-earnings ratio to 13.8, the cheapest since July 2010 and near the lowest valuation since the bull market began in 2009.
The retreat is no reason to sell stocks, investors including Laszlo Birinyi and Barton Biggs said. Data from Birinyi’s firm, Birinyi Associates Inc., shows the current bull market in stocks may last until 2013 based on the length of past advances.
“We are going to have a strong rally out of this position,” Biggs, who helps manage $1.4 billion in assets as managing partner and co-founder of Traxis Partners LP, said in a Bloomberg Television interview before markets opened today. He added that politicians had handled the debt-ceiling debate “poorly” and as a result dollar-denominated assets are “tremendously cheap.”
Stocks recovered after the Wall Street Journal reported that former Fed officials Donald Kohn, Vincent Reinhart and Brian Madigan said the central bank should consider a third round of bond purchases to help the economy.
Pacific Investment Management Co. and BlackRock Inc., which together oversee almost $5 trillion, say the U.S. economy is stalling. Bill Gross, who runs the world’s biggest bond fund at Pimco, and Peter Fisher, head of fixed income at BlackRock, say the Fed is preparing measures to counter the slowdown.
The Fed may arrange a third round of quantitative easing, known as QE3, Gross said. The central bank purchased bonds to cap borrowing costs in the first two easing efforts. The Fed has also promised to keep the target for overnight bank lending low for an “extended period.” The Fed may need to consider signaling an even longer commitment to low interest rates, according to BlackRock’s Fisher, who is based in New York.
“I believe the Fed is dusting off contingency plans if the economy does not improve,” he said in a report that BlackRock distributed by e-mail today. Fisher worked for 15 years at the Fed Bank of New York, according to BlackRock, which has $3.66 trillion in assets.
The S&P 500 sank 3.9 percent last week, its worst drop in a year, after government data showed U.S. gross domestic product expanded at a 1.3 percent annual rate in the second quarter and a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009.
Five Straight Declines
Thirty-year Treasury bond yields decreased for a fifth straight day, losing one basis points to 3.90 percent, the lowest end-of-day level since October. The yield, which sank to as little as 3.79 percent today, reached a record low 2.5 percent on Dec. 18, 2008, amid the worst economy since World War II, credit-market losses exceeding $1 trillion and the biggest drop in the S&P 500 since 1931.
Investors are also awaiting a government employment report in two days, which economists forecast will show the U.S. added a net 85,000 jobs last month including a 115,000 boost to private-sector employment. A private payroll survey by ADP Employer Services today showed U.S. companies added 114,000 workers in July, topping the median forecast of economists surveyed by Bloomberg News for an increase of 100,000.
Almost eight stocks fell for every one that gained in the Stoxx Europe 600 Index. Societe Generale SA slid 9 percent as France’s second-largest bank said it may miss its 2012 earnings target after second-quarter profit fell.
The franc depreciated 1.7 percent to 90.80 euro cents after strengthening to a record yesterday as investors pursued assets considered to be the safest. The franc weakened 0.9 percent from an all-time high versus the dollar.
The Swiss National Bank lowered its target for the three-month Libor to “as close to zero as possible” from 0.25 percent. The Zurich-based central bank said it will also expand banks’ sight deposits, or cash which can be withdrawn on demand, to 80 billion Swiss francs ($103 billion) from 30 billion francs and repurchase outstanding SNB Bills, according to a statement today.
Oil fell 2 percent to $91.93 a barrel on the New York Mercantile Exchange. The S&P GSCI index of 24 commodities dropped 1.8 percent, the sixth straight decline and the longest losing streak since May 2010. Gold futures rose 1.3 percent to a record $1,675.90 an ounce.
The MSCI Emerging Markets Index of stocks sank 2.2 percent, set for the lowest close in more than a month. South Korea’s Kospi Index slumped 2.6 percent, completing its largest two-day plunge since November 2009